Intergenerational Effects of Welfare Participation in Israel
Introduction
The Income Support Program is a means-tested benefit program that provides aid to low-income families in Israel. The support includes monthly cash assistance and in-kind benefits.
Shanan (2024) calculates the MVPF of a reform that increased the generosity of the income support benefits and relaxed eligibility requirements for single-parent households in 1992. The study employs administrative records and a Difference-in-Differences (DID) framework to estimate the intergenerational effects of the reform. The findings indicate that the increased welfare participation rates among single mothers following the reform had a significant impact on their children’s long-term economic outcomes. While the next generation’s welfare participation rates rose, their labor supply and earnings also increased. Girls exposed to the reform during childhood were more likely to rely on welfare as young adults, whereas boys experienced a sustained increase in labor earnings.
Shanan (2024) calculates the MVPF of the reform, accounting for its spillover effects on the next generation.
MVPF = 3.5
Net Cost
The net cost of the reform to the government encompasses several components: the reduction in tax revenue attributable to decreased labor earnings among single mothers, the expense of additional welfare benefits allocated to single mothers, the larger tax revenue resulting from an increase in children’s future labor earnings, and the increase in welfare benefits awarded to their children in adulthood.
The estimates suggest an average annual decrease of NIS 1,890 (2010 prices) in labor earnings for single mothers during 1993-1995, leading to an annual revenue loss of NIS 378 (calculated as 0.2 * NIS 1,890, assuming a flat 20% tax rate). If this decrease persisted over the following 10 years (i.e., until the 2003 reforms), the total forgone tax revenue would amount to NIS 3,780.
The increase in welfare transfers is estimated at NIS 1,750 a year, totaling NIS 17,500 over 10 years. Considering the value of in-kind benefits, estimated at NIS 25,000 per year, the estimated 0.048 increase in participation rates results in an annual increase of NIS 1,200 in in-kind benefits, totaling NIS 12,000 over 10 years.
Exposure to the reform during childhood is associated with an average increase of NIS 22,650 in cumulative earnings from age 20 to 30. To project this into a stream of lifetime earnings, it is assumed that this effect, in percentage terms (a 5% increase), persists until age 55. With an assumed 0.5% annual wage growth, future earnings are estimated to increase by NIS 76,700. At a 20% tax rate, this results in an additional tax contribution of NIS 15,340.
Furthermore, exposure to the reform increases cumulative welfare transfers by NIS 1,140 from age 20 to 30, with no impact on welfare usage beyond this age. The increase in average participation rates from age 20 to 28 by 0.007 yields an estimated value of in-kind benefits of NIS 1,575.
The net cost is therefore NIS 20,655 (= 3,780 + 17,500 + 12,000 – 15,340 + 1,140 + 1,575).
Willingness to Pay
The benefits of the policy to its recipients include the value of the increased welfare benefits provided to single mothers, the additional welfare benefits extended to their children in adulthood, and the rise in children’s lifetime after-tax labor earnings.
The value of welfare benefits for mothers comprises NIS 1,750 in transfers and NIS 960 in in-kind benefits per year. Assuming the impact lasts for ten years, and discounting to present value terms using a discount rate of 3%, the benefits are valued at NIS 23,810.
For children, assuming the impact lasts until age 55, the discounted value of the increase in welfare transfers and in-kind benefits is NIS 2,108, while the discounted value of the increase in their lifetime after-tax income is NIS 47,168.
The total willingness to pay is therefore NIS 73,086 (= 23,810 + 2,108 + 47,168).
MVPF Summary
Dividing this willingness to pay by the net cost yields an MVPF of 3.53.
References
Shanan, Yannay (2024). “The Intergenerational Effects of Welfare Transfers Among Single Mothers: Evidence from an Israeli Welfare Reform.”Journal of Public Economics, 237: 105207. DOI: https://doi.org/10.1016/j.jpubeco.2024.105207
Policy Features
- Category
- Social Insurance
- Sub-Category
- Cash Transfers
- Beneficiary Type(s)
- Adults
- Country of Implementation
- Israel
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1016/j.jpubeco.2024.105207